ARBOR OUTLOOK: Harry Caray, Brad Pitt and undervalued investments

Wednesday

A few weeks ago I attended an investment conference in my hometown of Chicago. Two of the featured speakers were bestselling author Michael Lewis and Chicago Cubs President of Baseball Operations Theo Epstein. That both were speakers at the same conference is ironic.

Lewis’ "Moneyball" tells the story of how the Oakland A’s competed with deep-pocketed “big market” teams by relying more heavily on data than the naked eye to evaluate players. And, most importantly, buying the contracts of those players for less than their true worth.

While I have not read "Moneyball," I did enjoy the movie starring Brad Pitt and Jonah Hill. At the end of the movie, A’s General Manager Billy Beane (played by Pitt) declines an offer to take over the Boston Red Sox as the highest paid GM ever in baseball.

Instead, the Sox hired a relatively unknown 28-year-old wunderkind named Theo Epstein. Epstein, employing many of Oakland’s and Beane’s tactics, helped the Red Sox win the World Series and break the “Curse of the Bambino.” More recently, he built the Chicago Cubs team that won the World Series a year ago and ended another curse and title drought. (Go Cubs!)

While Lewis and Epstein drew many parallels between baseball and investing, one in particular struck a chord — the best investments are often ones most people overlook. Lewis said he decided to write "Moneyball" after he walked through the A’s locker room and saw guys that “just didn’t look like baseball players.” They weren’t Greek gods, but they knew how to get on base and score runs, which Billy Beane had learned was the single most important factor in winning games.

Investments, like baseball players, get overlooked for all kinds of reasons, and as a result, some may be vastly undervalued. Folks may similarly undervalue a company or in baseball, a catcher whom they view as over the hill, even if he’s still incredibly productive. On the flip side, an exciting startup might have all the promise of a young budding prospect, but may never figure out how to get the job done and would therefore be overvalued. In short, the investing parallel is to sell the glamour players and buy the ugly ducklings who know how to win.

Companies that produce boring products rather than exciting ones tend to be systematically undervalued. Similarly, companies that have smaller shareholder bases are often less highly valued than companies with millions of shareholders. A company that was spun off from a parent or a business coming out of a restructuring might appear to be riskier than they really are. And therefore be undervalued by the market.